I was talking to someone the other day who's not a client but I was talking to them about retirement and this is someone that I know has done very well for themselves in terms of what they've saved what they've invested and I would assume their overall net worth now I know this is also someone that has lots of things that they are looking forward to in retirement but what I was surprised to find out was this person was terrified to actually retire and dawned on me that as much as I could tell from the outside
looking in that yes this individual if they do things correctly could easily retire two three four times over even but in their mind they were unable to connect the dots between what they wanted to do and where they are today and that prevented them from moving forward so what I want to do in today's episode is I want to make this a very practical straightforward easy episode to say what do you need to do to make 2025 the year that you actually retire and as we're talking about this even if you're years away from retiring
or even if you're already in retirement this episode is going to be a good refresher to help you determine what needs to happen for you to have a financially healthy retirement so that you can do what you want to do so there's three things that you need to do and number one is you need to assess your Current financial condition what does that mean well number one review all of your assets review what you have this is everything from things like checking accounts and savings accounts to what do you have in 401ks what do you
have in IRAs what do you have in Roth irats brokerage accounts health savings accounts so often we spend our whole lives working and we have all these different accounts yeah I open up a 401k at that company 15 years ago and it's still there my new company I have a 401k and this is where I'm contributing to I have a Roth IRA that I started a long time ago you know I think my spouse has some different accounts as well a lot of people are saving money but they don't actually know what the total value
is so start by taking inventory what are all the different accounts that you have and come up with a number of accounts you're going to count on for income and retirement what do I mean by that well any money that you have in cash you're not necessarily going to count that as part of your retirement portfolio unless it's a large amount of cash that you intend to invest or maybe you already have some money in a health savings account but that money's already been allocated to be used for some healthcare expenses that you have coming
up so really as you take inventory of what you have you're taking an eye towards or you're looking at it from the standpoint of which of these assets that I have will create income for me in retirement it's typically IRAs Roth IRAs 401ks brokerage accounts accounts of that nature what is that total number I'm going to come back to why that matters in a second but start there number two the second part of assessing your current Financial Health or taking inventory is understanding what are your monthly income and expenses and by in I don't mean
what income do you have in terms of your base salary at work I mean what amount of income is actually coming in you have your gross income but once you have federal taxes state taxes Social Security Medicare taxes 401K other deductions taken out what's actually hitting your bank account is typically significantly less than the Topline gross income number that you have coming in so understand what that looks like of yes no what your total income is but more importantly understand what is your monthly income that you're actually living on today look like from there you
can look at your expenses so whatever your monthly income is let's say that you earn $10,000 per month gross so $120,000 per year Well 10,000 per month gross doesn't mean $10,000 per month net after taxes after 401K after deductions that might be closer to $7,000 per month for the sake of this example so the next thing that you're going to do is you're going to say okay I have $7,000 per month of income coming in net income income that would need to be replaced if I was to retire how does that compare to my expenses
are you over extending yourself every month meaning 7,000 per month is coming in but you're spending 75 and gradually acing debt or is there less per month that you're actually spending for example maybe you're only spending 6,000 per month because the remaining ,000 between the seven that's coming in and the six that's going out is actually being saved that's something that's really important to understand because the income that you have coming in as a very basic starting point that's what you need to replace if you're going to retire if you have 10,000 per month gross
coming in before taxes but 7,000 per month net that net number is what you need to be able to recreate after taxes and retirement but to take it a step further if you're only actually spending 6,000 per month of that that's truly the amount that you need to recreate because $1,000 that you're putting aside in savings you don't need to continue saving in retirement if you're already at the point that you've arrived at what you're saving for so once you take an inventory on your income and your expenses you can get to a clearer number
that's going to help you determine what you need to replace in retirement the third part of taking inventory or monitoring your overall Financial Health is review this for any debts that you have do you have a mortgage for example and if so when will that mortgage be paid off let's continue with our example here 10,000 per month comes in Gross after taxes in 401K 7,000 per month comes in net great of that 7,000 per month you're saving $1,000 per month for retirement we don't need to keep saving for retirement once we're in retirement so really
6,000 per month is what needs to be recreated now we take a look at your financial situation a little bit deeper and we say of that 6,000 per month that you're actually spending 2,000 per month is on your mortgage payment the principal interest portion of it property taxes will account for separately and we also know that you want to retire in 5 years but your mortgage is projected to be paid off in four years well what does that mean means we don't need to recreate 6,000 per month to maintain current Lifestyle by the time that
you retire we only need to recreate $4,000 per month because that principal and interest portion of your mortgage is going away so once you start taking stock of where you are financially you start to whittle this down to say okay what do I actually need to do what do I need to recreate in retirement income which is the foundational piece of your retirement is how do you create the income that you need to survive and this exercise helps you go through that so once you've seen that and you say okay I have a mortgage and
it's $2,000 per month and I'm going to take that out now your real number is 4,000 per month now compare that to maybe having a car loan you say I have a car loan that's a few hundred bucks a month but but I plan every time I pay my car loan off let's just assume for example you buy a new car and you refinance that car well we can't just eliminate that expense from your budget that's something that you plan to continue doing whether you're saving a monthly amount to your next car or you're simply
financing a new car every time you pay your car off that's an expense that needs to stay in your budget because you're going to continue paying it unlike your home which once it's paid off it's paid off so step one of making 2025 the year that you actually retire is getting a sense of your overall Financial Health take an inventory of what you have starts with your net worth in terms of what do your portfolio look like what your assets look like then it goes into diving into your income and your expenses and then you
monitor that to see how is that going to change based upon some debt that I have that I might not have in retirement once you've done that the second step is to Envision what you want your ideal retirement to look like now this is where actually most people get tripped up a lot of people have a great sense of where they stand financially they could tell you where they stand on a daily basis in terms of how much they have in their portfolio how much are they spending each month where are their expenses some people
have that part completely dialed in where they're lacking in their planning is that vision of what do they want to do in retirement they're so focused on the numbers that they can't even think about well what do I actually do if I'm not working every week what would I actually do if I spent my time enjoying my money and spending my money as opposed to just saving it so get that vision for your retirement what do you want to do because nobody wants to retire and sit there bored every day sit there without purpose sit
there without meaning sit there without anything to do because you never got around to planning for what you want life to look like when you're retired so doesn't have to be an incredibly complicated exercise but understand what are the things that you value this could be Health this could be Faith this could be family this could be friends this could be Adventure this could be community service understand what do you value and then within each of those categories simply write down what are one or two things that you can do in retirement to pursue that
in retirement you don't have the 40 to 50 hours committed to a job that you don't to attend anymore you have that time that you can fully dedicate to your health that you can fully dedicate to friends to Adventure to service whatever you want to do but it's not just going to happen by accident and understand that there's a pretty dramatic transition that happens that when you get out of the workplace you need to find something to spend your time doing and that time could simply be hanging out around the house watching TV all day
but if that's the case make sure that's exactly what you want to do because my guess is most of you are thinking that's not the most satisfying retirement that's not what I want to do with my time so plan ahead what are you going to do with friends what are you going to do to recreate that sense of structure that sense of purpose what are you going to do with your time with your energy with your hobbies with your travel think ahead to what you want that ideal retirement to look like the reason we do
that is because then you can work backwards and say how much might that cost I say that because if you want to retire and you want to spend your days hiking and you want to every single day go on a different hiking trip but you live in the mountains that might not cost a whole lot sure you need some equipment sure you need some stuff but that's pretty low cost if you're spending your time Outdoors compared to the person who says I'm going to retire and I'm going to travel to a different country every 3
months that's pretty expensive plane tickets a place to stay accommodations everything that goes along with that so you can't really understand what your retirement is going to cost until you have a picture of what your ideal retirement looks like so once you get that Vision once you get a sense of what you want to do then work backwards to say generally speaking how much might that cost the third step then is that's where you connect the dots this is what most people fail to do some people are either really good at understanding their numbers but
they have no idea what they want to do in retirement other people have a perfect idea of what they want to do in retirement but they can't get a grasp on their numbers this third step is connecting the two of those when you have that vision for your retirement here's what you want to do here's what would need to happen to make retirement the absolute best season of your life then you work backwards to say what would it cost to do that what would it cost to travel like I want to travel what would it
cost to prioritize my health like I want to prioritize my health what would it cost to be able to give like I want to give what would it cost to spend time with family and friends and do the things that I want to do so this takes some work but if you don't do this work on the front end you're never going to get to enjoy the fruits of what you've worked for but once you go through that process and understand what it costs then you go back to your Current financial situation your Current financial
situation you have an understanding okay what income is going to come in in retirement so let's use the example I was using before if 10,000 per month that's coming in in gross income but after taxes and deductions and expenses on your paycheck 7,000 is actually hitting your bank account of that $7,000 you're saving $11,000 for retirement but again you no longer need to save that so it's really $66,000 that you need to replace but then again we determined that of that 6,000 2,000 of it is your principal interest payment for your mortgage that's going to
be gone by the time that you retire in this assumption so really it's only 4,000 that you need now Step One is say 4,000 is what you're spending today does that still align with your ability and your vision of what you want retirement to look like maybe it does maybe it doesn't let's assume for the second that it does so $4,000 okay that's going to perfectly allow you to do everything that you want to do well now we go to the income piece we say well what income sources might you have is there a pension
is there Social Security is there potentially some part-time work just for something that you enjoy doing not because you have to do it in retirement those are the things you explore let's just assume that you only have social security over are those things I mentioned and you retired you want to spend 4,000 per month and 1,500 per month is coming in from Social Security well the remaining 2500 per month needs to come from your portfolio and 2500 per month that's $30,000 per year the question is can you generate $30,000 per year from your portfolio assets
so once you have that $30,000 as I have in this example once again we need to work backwards we need to say okay 30,000 should be what percentage of my overall portfolio in other words if I have this portfolio going into retirement how much can I spend from it can I take 10% per year or is it 2% per year what amount is going to be sustainable over a 30 plus year retirement which is the average retirement projection for many people well there's a few different ways of looking at this but probably the most basic
and foundational is What's called the 4% role there's absolutely nothing magical about the 4% rule in terms of is this the perfect number to maximize or minimize spending no it was simply the result of a study that said look we have no idea if when you retire the Market's going to be booming and great and everything's going to be awesome or if you're going to retire we're going to go through a horrible bare market and that's going to last for several years before things recover and what this study found was that based upon the portfolio
mix the study was assuming 4% was about the maximum you could take so whether the economy was horrible or whether the stock market was horrible or great or anything in between you wouldn't run out of money over a period of about 30 years so that's a good Baseline to start from I think there's better ways of approaching it now and things you can add on to that but let's assume 4% so going back to this example you need $30,000 per year from your portfolio what you do is you divide that by 4% to essentially say
30% or 30,000 represents 4% of what bigger number in this example 30,000 represents 4% of $750,000 so if this was your plan if this was your goal you would essentially work backwards to say I need $750,000 to make this work now obviously these numbers I'm just pulling out of thin air your actual numbers are going to be different maybe higher maybe lower maybe right exactly what I'm talking about but this is the general framework that we're talking about when you do that you can get a sense of okay well I've added up my IRA and
my Roth IRA my 401k my brokerage account because I did that in step one I can compare that total to the total that I actually need and now I can see am I either right on track or maybe I'm actually well beyond the point that I could have retired years ago or maybe I'm not quite there maybe I still need to keep saving keep growing keep waiting until I get to that point but once you do this this process is a very simple process to get you started in the right direction to say that we've
dreamed of retirement we've prepared for retirement we've looked forward to it but so many people can't pull the trigger going back to my conversation earlier that I referenced the individual I spoke with had done really well they actually had a great dream for way they wanted to do in retirement they just couldn't connect the dots it was too overwhelming to them when they think there's tax strategy there's estate planning there's withdrawal stuff there's all these different things I hear people talking about and they got analysis paralysis and every went through this simple foundational framework of
saying what do I need to have coming in to support my desired lifestyle how does that compare to where I am and how does that inform whether or not I can actually retire today so my hope for you as we go into 2025 is that wherever you are and you're saving investing retirement Journey you're doing what you're doing because it's what you want to do I see too many people who continue working well beyond needing to work because they don't have a plan in front of them to actually retire I see some people retiring too
early into retirement because they don't know financially what's needed to actually make it a reality so when you have this plan not only does it give you confidence for the future but it gives you peace of mind about today that you're doing the right things you're striking that right balance between preparing for the future and what that holds as well as making sure that you're enjoying today so I hope that that's helpful I hope 2025 is an incredible Year I hope that those of you that love work and are passionate about work keep doing it
works an incredible thing for those of you that a little burned out and over it and ready to retire I hope that you have a plan in place to move towards that so as you go through it this is the first step understand where you are today understand where you want to be in the future and then connect the dots to see if what you have can get you to where you want to be I hope that's helpful this is a podcast dedicated to helping you make the right retirement decisions this is a YouTube channel
helping you to make the right retirement decisions if you've enjoyed this and you're listening on the podcast please leave a review helps more people find the show and I always appreciate when people do that if you're listening on YouTube make sure that you like make sure that you subscribe make sure that you share this with friends and family who are also considering what to do with their retirement that's it for today thanks as always for listening and I'll see you next time Root Financial has not provided any compensation for and has not influenced the content
of any testimonials and endorsement shown any testimonials and endorsement shown have been invited have been shared with each individual's permission and are not necessarily representative of the experience of other clients to our knowledge no other conflicts of interest exist regarding these testimonials and endorsements once again I'm James canol founder root financial and if you're interested in seeing how we help our clients at root Financial get the most out of life with their money be sure to visit us at www. root Financial partners.com
